Optimal Forbearance of Bank Resolution

March 2018
Linda Schilling

We analyze optimal strategic delay of bank resolution ('forbearance') and deposit insurance in a setting where, after bad news on the bank, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Under low insurance coverage the optimal intervention policy is to walk away. Optimal deposit insurance coverage is always interior. Fast intervention cannot minimize public losses and be optimal at the same time. The paper sheds light on the dierences between the U.S. and the European Monetary Union in terms of their bank resolution policies.